Beazer Homes (NYSE: NYSE:BZH) has reported a strong performance in the second quarter of fiscal year 2024, with a 10% increase in new home orders and a closing of 1,044 homes at an average sales price of $516,000. The company outlined its strategic goals, including a commitment to Zero Energy Ready homes and a strong balance sheet, while also hinting at possible share repurchases.
Key Takeaways
- Beazer Homes closed 1,044 homes at an average price of $516,000.
- New home orders rose by 10%, attributed to a higher community count.
- The company reported a gross margin of 21.7% and adjusted EBITDA of $58.8 million.
- Multiyear goals include over 200 active communities by 2026 and 100% Zero Energy Ready homes by 2025.
- Beazer Homes anticipates continued growth and improved profitability in fiscal year 2025.
- The company controls necessary land for growth and aims for a book value per share of $40+.
- Beazer Homes has liquidity of $433 million, with plans to invest at least $750 million in the fiscal year.
- CEO Allan Merrill highlighted the higher cost but increased value of new home series.
Company Outlook
- Beazer Homes projects continued growth and improved profitability for fiscal year 2025.
- The company has a positive outlook on achieving its multiyear goals, including expansion and deleveraging.
- Expectations include higher gross margins in 2025 compared to 2024.
Bearish Highlights
- The southeast region saw a decline in orders, but the company does not view this as a significant concern.
- Merrill indicated it is too early to consider consistent dividends.
Bullish Highlights
- Beazer Homes' homes qualify for a $5,000 tax credit, potentially increasing margins.
- The company has refinanced senior notes and extended revolver expiration, enhancing liquidity.
- CEO Allan Merrill sees share buybacks as an attractive use of capital given the current stock price.
Misses
- CEO Allan Merrill acknowledged the company has not fully capitalized on the revenue potential of their new home series.
- There has been a slight increase in interest in temporary buy downs due to higher interest rates.
Q&A Highlights
- In response to questions, Merrill expects gross margins to improve in the fourth quarter of 2024.
- The company is looking to sell remaining spec homes in the third quarter.
- Merrill stated that incentives have not seen significant changes compared to the previous year.
Beazer Homes has demonstrated a solid quarter with promising developments in its strategic initiatives and financial health. The company's focus on Zero Energy Ready homes and active community growth aligns with its long-term vision. With a strong balance sheet and prudent capital allocation strategies, Beazer Homes is positioning itself for sustainable growth and shareholder value creation. Investors and stakeholders will likely watch closely as the company moves towards its ambitious targets in the coming fiscal years.
InvestingPro Insights
Beazer Homes has shown resilience in the face of a challenging housing market, and the latest data from InvestingPro underscores some key financial metrics that investors should consider. With a market capitalization of $855.03 million and an attractive price-to-earnings (P/E) ratio of 5.68, which adjusts to an even more favorable 5.29 for the last twelve months as of Q2 2024, the company is trading at a low earnings multiple. This could indicate that Beazer Homes is potentially undervalued compared to its earnings, a point that might interest value-oriented investors.
In addition, the company's liquid assets surpass its short-term obligations, which suggests a strong liquidity position that could support its strategic goals and provide resilience against market fluctuations. This financial stability is a critical factor for the company as it continues to invest in growth and innovation, such as the Zero Energy Ready homes initiative.
Revenue for the last twelve months as of Q2 2024 stands at $2.146 billion, despite a slight decline in growth rate by -8.4%. This figure demonstrates the company's capacity to generate significant sales, even as it navigates market headwinds.
For those seeking more in-depth analysis, InvestingPro offers additional insights. There are currently 5 more InvestingPro Tips available for Beazer Homes, which can be accessed at https://www.investing.com/pro/BZH. These tips provide a comprehensive look at the company's financial health and future prospects.
Investors interested in leveraging these insights can use the coupon code PRONEWS24 to get an additional 10% off a yearly or biyearly Pro and Pro+ subscription, providing access to a wealth of data and analysis to inform investment decisions. With analysts predicting profitability for the current year and the company having been profitable over the last twelve months, Beazer Homes presents an interesting case for those looking to invest in the home construction sector.
Full transcript - Beazer Homes USA Inc (BZH) Q2 2024:
Operator: Good afternoon and welcome to the Beazer Homes Earnings Conference Call for the Second Quarter Ended March 31, 2024. Today’s call is being recorded and a replay will be available on the company’s website later today. In addition, PowerPoint slides intended to accompany this call are available in the Investor Relations section of the company’s website at www.beazer.com. At this point, I will turn the call over to David Goldberg, Senior Vice President and Chief Financial Officer.
David Goldberg: Thank you. Good afternoon and welcome to the Beazer Homes conference call discussing our results for the second quarter of fiscal 2024. Before we begin, you should be aware that during this call we will be making forward-looking statements. Such statements involve known and unknown risks, uncertainties and other factors described in our SEC filings, which may cause actual results to differ materially from our projections. Any forward-looking statements speaks only as the date the statement is made. We do not undertake any obligation to update or revise any forward-looking statements whether as a result of new information, future events or otherwise. New factors emerge from time-to-time, and it is simply not possible to predict all such factors. Joining me today is Allan Merrill, our Chairman and Chief Executive Officer. On our call today, Allan will discuss highlights from our second quarter, the current environment for new home sales, some details in our operational strategy this spring, and an update on the progress we’re making towards our multiyear goals. I’ll then provide details on our second quarter results, our forward expectations, our review of our balance sheet and land spending, and then conclude with a review of our book value per share and the framework we employ in considering capital allocation. We will conclude with a wrap-up by Alan. After our prepared remarks, we will take questions in the time remaining. I will now turn the call over to Allan.
Allan Merrill: Thank you, Dave, and thank you for joining us on our call this afternoon. Our team delivered another successful quarter, highlighted by solid sales results and excellent profitability from a growing community count. We also invested for the future and enhanced our capital structure. In more detailed terms, new orders were up 10% from the prior year as we generated a pace just over three sales per community per month. This provides us with the backlog to modestly increase our expectations for full year deliveries. EBITDA was over $58 million, driven by slightly better than anticipated gross margins and careful management of overheads. We ended the quarter with 145 active communities, up from 136 at the end of December and 121 a year ago. Land spend was nearly $200 million, bringing our total 12-month spending over $740 million. And finally, with our senior note issue and an extension of our revolver, we strengthened our balance sheet, enabling the consideration of a broad range of capital allocation priorities. In addition, we were recognized for both our culture and the energy efficiency of our homes. We also held our annual fundraiser for our national charity partner, Fisher House, which generated nearly $2 million. We remain very confident in the multiyear strength of the housing sector and new home production in particular. Our thesis is anchored by both supply and demand factors. Shortfalls in new home production over the past decade and the lock-in effect of higher mortgage rates both contribute to very tight supply, and an economy characterized by low unemployment, wage growth and attractive demographics for potential homebuyers provides clarity on the sources for current and future demand. Last quarter, I outlined our view that over the balance of the fiscal year, our sales pace and to some extent, the mix and gross margins on those sales was likely to be closely related to mortgage rates due to strained affordability. We articulated three scenarios defined by the direction of rates, and this framework proved to be quite accurate in the second quarter. During the second quarter, mortgage rates moved around, ultimately rising about 20 basis points. This fell inside our base case and as such, we were able to exceed our sales goals, though with a slightly larger share of spec home sales. Since the end of the quarter, rates have moved nearly 50 basis points, further straining affordability. If these rates persist, it’s likely we will continue to see a stronger preference for specs. As we have talked about for several years, we are in the midst of transitioning to Zero Energy Ready homes in all new and longer lasting communities. We call these our READY Series homes. While we’ve committed that 100% of our starts will be READY Series by the end of next year, we are substantially ahead of schedule, with more than three quarters of our starts being built to this standard last quarter. Given the importance we’ve placed on developing and delivering our READY Series homes, I am pleased to report that despite having somewhat higher construction costs, these homes are generating higher margins than our prior series. So this spring, to accelerate our transition to the READY Series, we’ve been encouraging our teams to be very competitive with pricing and incentives on our earlier STAR and PLUS Series homes. This will allow us to close out of older communities more quickly and simplify our production and sales efforts around the READY Series. We can prove that these are the best built homes in our markets, and the sooner we are solely focused on building and selling them, the better. While this acceleration makes sense, there is a short-term financial consequence which will be apparent in the third quarter. Margins will be down sequentially, partially as a result of a higher share of specs, but more so from our efforts to move through our older series homes. With that said, we expect margins to rise in the fourth quarter as our mix of closings shifts strongly toward READY Series homes. And for the full year, our EBITDA net income expectations remain within the range of our prior outlook as we anticipate more closings and tighter management of overheads to offset much of the short-term gross margin pressure. Dave will provide specifics, but I wanted to explain why we chose to impact the mix and pricing of our sales this spring. Finally, let me update you on our progress toward our multiyear goals. As it relates to our goal to have more than 200 active communities by the end of fiscal 2026, as I mentioned, we closed the quarter with 145 active communities, up nearly 20% versus the prior year. We expect to end the fiscal year with more than 155 communities, representing year-over-year growth of about 15%, which also happens to be a good benchmark for projecting year-end community counts in 2025 and 2026. As it relates to our balance sheet goal of having a net debt to net cap ratio below 30% by the end of fiscal 2026, we completed the quarter with a ratio at 43.4%, up a little bit versus the prior year. This is simply a function of the seasonality and timing of our land spend. By the end of this year, we expect this ratio to be in the mid to low 30s, positioning us to be comfortably under 30% by the end of fiscal 2026. And finally, as it relates to our goal to have 100% of our starts Zero Energy Ready by the end of calendar 2025, I’m very pleased that we reached 77% READY Series starts in the second quarter. With our acceleration, we are in excellent shape to reach our stated goal, perhaps even early. As we get closer to fiscal 2025, I’m excited to see the impact that community count growth, reduced leverage and a truly differentiated product will make to our financial performance. And with that, I’ll turn the call back to Dave.
David Goldberg: Thanks Allan. For the second quarter of fiscal year 2024, new home orders were 1,299, up 10% compared to the prior year, driven by a 14% increase in average active community count. This translated to a sales pace of 3.1 sales per community per month, slightly above our guidance. We closed 1,044 homes generating homebuilding revenue of $539 million with an average sales price of about $516,000. Gross margin excluding amortized interest, impairments and abandonments was 21.7%. SG&A was 11.5% of total revenue, as we continue to prudently invest for our rapidly growing community count. Adjusted EBITDA was $58.8 million. Interest amortized as a percentage of homebuilding revenue was 3.0%. Our GAAP tax expense was $6.7 million for an effective tax rate of 14.7%. Net income was $39.2 million or $1.26 per share. This included an $8.6 million pretax gain or $0.28 per share of EPS from the sale of our investment in Builder Homesite, a technology company specializing in digital marketing for new home communities. This gain contributed to our higher tax rate but has been excluded from our adjusted EBITDA. Our third quarter expectations contemplate mortgage rates staying about where they are now, with the economy remaining generally supportive. In this environment, we expect to sell at least three homes per community per month and end the period with approximately 150 communities. We expect to close 1,150 to 1,200 homes, up modestly versus the prior year with an ASP of roughly $505,000. Gross margins in the quarter will likely be about 20% as we work through sales arising from our acceleration to the READY Series. SG&A as a percentage of total revenue should be approximately flat compared to the prior year. Together, these results should generate adjusted EBITDA above $50 million. Interest amortized as a percentage of homebuilding revenue should remain in the low 3s and our effective tax rate should be less than 12% as we continue to benefit from energy efficiency tax credits leading to diluted earnings per share above $0.80. Turning to our full year, we now expect to deliver over 4,750 homes, reflecting more than 10% annual growth and an ASP of about $510,000. Based on our third quarter margin guidance, we expect our full year gross margin to be above 21%, implying a good recovery in the fourth quarter for more READY Series homes. SG&A as a percentage of revenue should be around 11% as we continue to carefully manage overheads. Achieving these results would lead to adjusted EBITDA greater than $260 million and diluted earnings per share of at least $4.50 based on an effective tax rate of 15%. At this level, we’ll generate double digit returns this year, while positioning the business for significant growth in fiscal 2025 and beyond. Speaking of 2025, while it’s still a little early to give specific guidance, I want to offer some initial thoughts on revenue, gross margin and returns. Revenue should be significantly higher year-over-year, driven by our community count growth. We expect gross margin to improve in fiscal 2025, in part because of the mix shift Allan described. In fact, over time, margins on our READY Series homes should continue to improve as we work with our trades to reduce their build costs. It’s also worth noting that every Zero Energy Ready Home we deliver qualifies for a $5,000 tax credit, which would translate to about another point of margin if it weren’t buried in our tax expense. Ultimately, higher revenue and improved gross margin from an increasing number of communities should lead to greater profitability and higher returns next fiscal year. Turning to our balance sheet. In March, we refinanced our 2025 senior notes with a new note due in 2031, leaving us with no maturities until 2027. We also extended our revolver expiration to March of 2028. We ended the quarter with total liquidity of $433 million, providing plenty of firepower for our growth ambitions. Pivoting to our investment and land, we spent nearly $200 million in the quarter, driving our year to date spending to just under $400 million. We remain on track for full fiscal year spending of at least $750 million with the ability to invest more as opportunities arise. Even as we have increased land spending, we remain focused on balance sheet efficiency to drive attractive returns. More than half of our total lots are controlled through options, a ratio we expect to sustain. Finally, as it relates to our community count, we already control all the land we need to hit our fiscal 2025 growth goals and most of what we need to hit our 200 community count goal by 2026. Achieving our profitability will lead to a book value per share of $40 or higher by the end of the fiscal year. The chart on Slide 18 shows the progress we’ve made thus far in growing our stockholders equity, having more than doubled our book value per share in just the past four years. In recent years, we’ve generated growth in our share price, but it has remained below our book value even as the composition has dramatically improved. Last year, we conducted a comprehensive investor survey to get the root cause of that disconnect. The result of that survey was clear. Shareholders told us they wanted to see a robust and sustainable growth trajectory and a less leveraged balance sheet. Those results led us to introduce our multiyear goals, which include ambitious growth and deleveraging objectives. These multiyear goals form the foundation of our approach to capital allocation because we agree with our shareholders, generating growth and balance sheet strength are essential to creating shareholder value. Today, we have excellent visibility into achieving these goals. This is allowing us to contemplate alternatives for our excess capital. In practical terms, that means we are weighing the return and risk characteristics of additional land investments against the value created through share repurchases. Given our valuation in relation to current and future book value, we believe share repurchases are likely to represent an attractive additional use of capital. We have $41 million remaining in our previously authorized share repurchase program. With that, I’ll turn the call back over to Allan.
Allan Merrill: Thanks again, Dave. We’re pleased with the results we generated in the second quarter. We delivered solid orders and profitability from a growing community count and we positioned our company for the future with significant growth in our lot pipeline. Perhaps more importantly, we’re excited about where we’re headed. We have a clear path to reaching each of our multiyear goals. They represent substantial growth in the business, a resilient and flexible balance sheet and an innovative and differentiated product offering. We are confident we can create significant shareholder value from these results. To close, I’d like to acknowledge my colleagues here at Beazer. We have a truly exceptional team, all of whom are committed to creating value for our customers, for our partners, for our shareholders and for each other. I could not be more proud to represent them. With that, I’ll turn the call over to the operator to take us into Q&A.
Operator: [Operator Instructions] Our first question comes from Julio Romero from Sidoti & Company. Please go ahead.
Julio Romero: Hey, good afternoon. Hey, guys. Thanks for all the color on the product mix next quarter and the accelerated closeout of STAR & PLUS Series homes and kind of the strategic rationale behind it. I guess just my question is, how confident are you that the financial impact is only centered around the third quarter? And maybe talk about the scenario if that leaks into the fourth quarter.
Allan Merrill: Yes, I’ll jump in first Julio and thank you for the question. I think we’re very confident that the margins in the READY Series homes are higher, both in the specs and to be built that we’ve sold than on our PLUS and STAR, and we’re going to run out of PLUS and STAR homes. That was sort of the point. So confidence into the fourth quarter is very good. Now, look, there’s an overlay on any of this. If the rate environment is radically different, substantially higher rates over the next three or four months than what we’ve experienced, there may be other things going on, but it’s not going to be the fault of the product mix.
Julio Romero: Very helpful. And then any way to kind of parse out the margin impact between for next quarter between greater specs versus the accelerated closeout of the STAR and PLUS homes?
Allan Merrill: The thing is, it’s look, anticipate the question. Appreciate the question. It’s a really tough one. It’s not an easy thing because a lot of the specs are also STAR or PLUS. So is the effect because they were specs or is the effect because they were STAR or PLUS? Our sense is this more significant impact? More than half is related to intentionality on our part to get beyond STAR and PLUS. And the minor portion relates to a slightly higher mix of specs in the quarter. But as I’ve said, the two things kind of overlap because getting through STAR and PLUS, that’s what most of our specs were.
Julio Romero: Yes, I got you. That makes sense. And very good. Thanks for all the color and thanks for the color on the community count growth and I’ll pass it on.
David Goldberg: Thanks, Julio.
Operator: Next we’ll go to the line of Alex Rygiel from B. Riley. Please go ahead.
Alex Rygiel: Thank you very much. Nice quarter, gentlemen. Can you talk about the cadence of new order activity throughout the quarter and into the month of April?
Allan Merrill: It was, it built. January wasn’t great. February was a little better and March was better than February. I don’t have final April numbers, honestly. We closed the month yesterday. I would say April was choppy. It was similar to March. It didn’t really differentiate itself significantly. Some markets a little better, some markets a little weaker. But we don’t release monthly order numbers because I just think at our size, it’s very hard to draw conclusions from a month. But I don’t see anything fundamentally different in April than we saw in March.
Alex Rygiel: And in your implied full year closings guidance suggests a very strong step up in the fiscal fourth quarter. Maybe one of the best on record. I suspect you’ve got that visibility in your backlog at this time, but maybe if you can comment on that?
David Goldberg: Yes. Look, Alex, it’s Dave. I would comment that we feel pretty comfortable given the production universe that we have, and you can see in the queue the number of units we have under production between the backlog and our specs are under construction. We feel real comfortable with the full year guide and increasing the guide as we did in the quarter. But frankly, you’re right, there is still work to do for the fourth quarter and we’re out doing the work. So I think your assumptions are correct and the math you’re doing is right. But we feel real comfortable given the size of the backlog in the production universe.
Allan Merrill: And let me just add one other frame on that. It’s not perfect, but I know it’s a bit of an industry convention to look at backlog and do a conversion ratio of what will backlog be at June 30 and what percentage of that will close in the fourth quarter. It’s a much higher fourth quarter backlog conversion than the last couple of years, but that’s also a function of the fact that cycle times are dramatically different than they were over the last couple of years. So we won’t be back to the kinds of backlog conversion that we had pre-COVID. So, yes, it’s a big step up when you sort of put it in the pre and post-COVID context with the production universe that we’ve got. We feel very good about it.
Alex Rygiel: Thank you.
Operator: Next, we’ll go to the line of Alan Ratner from Zelman & Associates. Please go ahead.
Alan Ratner: Hey, guys. Good afternoon. Nice quarter, and thanks for all the detail. Allan, first, and I apologize if you’ve given this detail in the past, but I was hoping you could just go into a little bit more detail on exactly kind of what the primary differences are between READY Series and the older series. I’m not sure if they’re drastically different in terms of floor plans or anything else that would kind of contribute to that margin lift that you’re citing here.
Allan Merrill: So there are a number of things, and, in fact, I have to admit, Alan, I was really hoping for this question and, in fact, anticipating it. So there is a slide in the appendix that has both the homeowner benefits and some of the building science features that make these homes different. The envelope is different. The way it’s wrapped, it’s different. The way it’s insulated is different. It has what’s called an ERV or an energy recovery ventilator. The thing that a consumer would immediately notice is typically two by six walls. They’d also notice that the ducts are all in conditioned spaces, which kind of makes sense to people. They’re like, gosh, running a bunch of ducts in an unconditioned attic where I’m losing a lot of heat or I’m gaining a lot of heat, depending on the season, is a problem. And then as we talk to people, we can really put mathematics with third party validated testing on it relative to what’s called a HERS score. But maybe even more importantly, the air exchanges per hour. Now, I know that a large portion of our buyer population doesn’t walk into a new home community saying, I’m shopping HERS or I’m shopping ACAs [ph]. So for us a big opportunity is to explain to people the value that represents for them. And then when they say okay, well that all sounds good, but everybody sort of talks about green, where’s the proof? And that’s where the third party validation, the testing and the metrics are. And then frankly they can’t unsee what they’ve seen. They go into another community and they ask to see somebody’s HERS scores. And our homes are pulling 30s and low 40s. They’re going to go see 70s and people are bragging about them. So those are some of the characteristics that are different. I don’t know if that totally answers your question. If we go a lot deeper, I want my building science people to get into it. But I will tell you, I’ve highlighted the features in this exhibit. So that you can see very clearly the things that a buyer sees and understands. If we do our job, this just makes it a better home.
Alan Ratner: Got you. So on that point though, I mean is the better margin, would you say more of a cost savings or, it sounds almost from what you’re describing, you almost get more of a price premium given all of these features in the home. So is it more of a price versus a cost savings standpoint?
Allan Merrill: Yes. It’s definitely a price issue because the cost to build these homes are higher than the cost to build our prior series homes.
Alan Ratner: Got it.
Allan Merrill: And Dave talked a little bit about 2025 and I mean it’s obviously early, but the thing that we have seen, every community or every division started with one community with zero energy ready and one home. And then it was the whole community and then it was two communities and this ball rolling downhill in terms of building momentum. What’s really starting to happen is the trades get it. They are seeing benefits in cycle time. For example, our HVAC contractors are able to take a couple of days out of the install with the advanced duct install with our homes. They didn’t know that at first. They were charging us a premium. They’re like, we don’t know what this is. We haven’t used these products, we don’t understand it, we don’t really want to do it. You’re going to have to pay extra to get us to do it. Now they look at it and say wow, this home is actually going to be much better from a warranty standpoint, it was faster for us to build. Yes, we’ll do that again, please. And we haven’t, I don’t think, really scratched the surface and clawing back some of those savings, though today it is the fact that these homes are more expensive to build. And I don’t want to in any way diminish our efforts to date, but I still don’t think we’ve really scratched the surface on truly connecting buyers with realizing this is a home they cannot buy anywhere else. And I have done this personally in markets when I travel. Let’s go look at a $2 million home and let’s see what their HERS score, what their ACH score is. Let’s ask questions like to create a comparator to the kind of home that we’re buying or building. We’ve got an opportunity to get better and better at explaining that. And that’s why I think the revenue side is an opportunity as much as the cost side is.
Alan Ratner: Great. Thank you for all that detail, Allan. And I’m not surprised you had the slide prepared for us. So thank you for that as well. Second question, if I could. You mentioned the slide in your first quarter deck that kind of had the three scenarios, and I happen to pull it up. And the downside scenario in that deck is an environment with rates in the high sevens, which we’re kind of pushing back up against today. I’m sure that’s not what you and everybody expected three months ago. But on that slide, you also said, and I guess in that environment you would expect the sales pace to be sluggish and incentives to be higher. It doesn’t sound like from your comments, you’re really seeing that effect from the move-in rate. So I’m just curious if you could maybe just talk through what you are seeing in response to higher rates. Has the consumer been largely agnostic to it? Are you incentivizing more to kind of buy down the rate or do other things to improve the affordability equation, given the move higher.
Allan Merrill: We haven’t seen a dramatic shift in incentives, particularly financial incentives. We have seen a migration, and that overstates it. We’ve seen a move toward more temporaries than permanents as rates have moved up. Obviously, you get pretty good bang for the buck on a two one or a three two one [ph]. And in a higher rate environment, I think some buyers are analyzing that and saying, well, it’s unfortunate, but with attempt I am going to get a lower pay rate for a few years and I will have an opportunity to refinance. I’m always at pains to point out, I don’t know why I feel so strongly about it, that, of course, when buyers use temporary buy downs, they do qualify at the full pre buy down rate. So this is not creating a different kind of a housing problem. And those of us who’ve been around the industry a long time, want to always be very clear about this isn’t like some previous period. But we are seeing a little more interest in the temporary buy downs. And the other thing that we saw, and we saw it in the second quarter, and I think we’re going to see it in the third quarter, and frankly, it’s going to help us a little bit, is, I think, heightened interest in specs. I think that’s the other thing that happens. And given that, I’d really like our remaining spec or Star and Plus series to go away in the third quarter, I’m okay with that.
Alan Ratner: Got it. All right. Thanks as always, I appreciate it.
Allan Merrill: Thanks, Alan.
Operator: [Operator Instructions] Our next question comes from Alex Barron from Housing Research Center. Please go ahead.
Alex Barron: I’m sorry. Thank you, gentlemen. Yes, I wanted to focus on shared buybacks. I heard you mention it a little bit at the end, but I was just curious, what would it take at this point, given the valuation for you guys to step up and buy – start to buy some, given the big discount to book value?
Allan Merrill: Well, Alex, we tried to make it pretty clear in the prepared remarks. We have a framework that we use. It’s a consistent framework that looks at risk versus reward. And I would tell you we have a $40 million authorization that’s currently outstanding. And given where the stock is currently trading, not just from where the book is today, but where we see and have visibility on where it’s going to be over time, it looks like a much more attractive use of our capital on a go forward basis from a risk and return perspective. I won’t get too detailed beyond that, but clearly we’re looking at it and evaluating it all the time on a real time basis.
David Goldberg: I’ll go a little further. I think we will be in the market executing against some share buyback. What we’re not going to do, Alex, is just say, hey, at any price, it’s the right thing to do. But in the current context of the share price, I do think that we will be participating in share buybacks when our window opens this quarter.
Alex Barron: Yes, no, I’m not saying at any price, but when it’s trading at a 30% discount to book, it seems almost like a no brainer. But anyway, good to hear that. What about similar thoughts on dividends? Maybe you’re not quite there yet, but other builders have started to launch more consistent dividends. Just your thoughts around that.
David Goldberg: I would tell you, Alex, it feels a little premature to have that conversation. I think, Alex, I think we try to make it pretty clear kind of what the considerations in the market and frankly, repurchase program, as Allan said, seems to make a lot of sense given where we are. So…
Allan Merrill: Yes, and we want to execute our multiyear goals, like we’ve got, we are going to grow the community count. We are going to have net debt to net cap below 30% when we said we would. And we think we can do that and accommodate in these, this range of share price and buybacks. But I think to go beyond that in terms of returning capital to shareholders, we need to get a little further along.
Alex Barron: Okay, great. If I could ask one more on the orders, the southeast region orders were down 30%. And is that just mainly because you’re experiencing strong demand and communities are selling out faster than you’re replacing them or what’s going on there?
Allan Merrill: Yes. Excuse me. A lot of our southeast divisions do not have very large community counts. And one of the things that happens to us occasionally in the southeast is that we’ll gap out because we don’t run a big, big spec program. So we can get caught between phases a little bit. I don’t think anyone should infer from a quarter a particular narrative around the southeast. Our southeast markets pretty good. We are happy to be in them, and frankly, we’re growing community count in every one of them.
Alex Barron: Okay, great. Well, best of luck. Thank you.
David Goldberg: Thank you, Alex.
Operator: Thank you. [Operator Instructions] Currently our last question in queue is from Jay McCanless from Wedbush. Please go ahead.
Jay McCanless: Hey, good afternoon, everyone. So, I wanted to ask also on the orders with both the southeast and the east down pretty significantly relative to where the west was, the cynic in me says some of this move to the READY PLUS Homes is move some inventory, generate some cash flow in a very competitive environment. Is that the right way to think about this? Or is there really a push to get some of these newer homes out there?
David Goldberg: We really want to get the newer homes out there. You are familiar with our balance sheet. There isn’t really a generate cash focal point. We’re really trying to maximize the value of every community. We’ve got some communities that have been in the STAR and PLUS Series where we’ve been able to introduce READY. We want to accelerate that. We’ve got some communities that are not going to be converted or transitioned to READY. I’d like to build out of them. And in the communities where we are, and all new communities are only READY, we definitely want to get some sticks in the air. So we are seeding, as we always do, those communities with some specs. But that the focal point is really around. The sooner we have clarity, certainty, and the simplicity of we sell READY homes, they’re better built and they perform better. I think the happier will be, our buyers will be and our shareholders will be.
Allan Merrill: Jay, I would tell you in the east, the sales pace was very much in line with the overall company average. It was a little bit tough comp from last year, but there’s really nothing feed into there.
Jay McCanless: Okay. And then I wanted to ask, I’m looking for the slide in the deck where you said that the, okay, I get Slide 14 where you say that the gross margins when you transition to already homes or mostly Ready Homes is going to be improved versus the second half of fiscal 2024. But when I’m looking at the numbers you gave right now, it looks like 20% adjusted gross margin for the third quarter, probably something in line and maybe a little bit better for the fourth quarter. And that’s a pretty easy bar to say. You’re going to be higher than. Where are these margins going to compare to where they were in the first half, where you guys had a pretty good set of gross margins the first half of this year?
Allan Merrill: Well, Jay, just for a quick correction on the question, the words in the script were pretty clear. If you look at the full year gross margin guide, it suggests a pretty significant pickup in the fourth quarter. So it’s not going to be around 20%. We said it’s a number better than that.
David Goldberg: And I think we got it to above 21% for the full year. The only way you’re going to get there with Q3 at 20% is a good lift in Q4.
Allan Merrill: Exactly.
Jay McCanless: Okay. But then still, the question is, how does the margins under these new homes compare to what you were doing in the front half? Is it going to be equal, slightly less as you get the build issues worked out? What should we expect from that?
David Goldberg: Well, I guess, I would say is, we think that margins in 2025 will be higher than margins in 2024. And that’s because these are homes that command, I think that kind of value, and because I think we can keep working on getting our build costs down. So, I, it’s hard to make a comparison of one period to another period as which periods and which homes. But at a higher level, what we’ve said is 2025 will be above 2024.
Jay McCanless: Okay. And then the last one I had just on the specs. It looks like your specs and process were up sequentially from first quarter to second quarter. Could you talk about what’s driving that?
David Goldberg: Community count growth? Yep.
Allan Merrill: Jay, if you look at our slide, we actually show on a per community basis, and it’s really not dissimilar on a per community basis. It’s just that we have the community count growth coming online, and that’s driving some incremental specs.
Jay McCanless: Okay. And then actually did have one more. What was the incentive percentage in the quarter, and what was it in the prior year?
David Goldberg: Let me grab it for you one second. Jay. I don’t have it in front of you, in front of me right now. I can tell you, Jay, the number hasn’t moved too significantly in the second quarter. It’s been a pretty minimal change. I can follow up with the exact number, but we look at it pretty closely on a quarter-by-quarter, quarter-by-quarter, week-by-week basis to see what’s happening. It really didn’t move much in the second quarter.
Jay McCanless: Okay, great. Thanks for taking my questions.
Allan Merrill: Yes. You bet, Jay. Thank you.
Operator: And I am showing no further questions.
Allan Merrill: Okay. I want to thank everybody for dialing into our second quarter call. We look forward to timely in next quarter as we move toward the end of the year. Thanks so much and have a good night.
Operator: Thank you all for participating in today’s conference. You may disconnect your line and enjoy the rest of your day.
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